The investment guru Warren Buffett

Who doesn’t know him? If there is one man who can be directly associated with investing then it is investment guru Warren Buffett.

In the past 10 years the share price of his company Berkshire Hathaway has increased by a whopping 150%. By comparison, the S&P index increased 75% in the same period. Additionally, in 43 of the 44 years Berkshire has outperformed the S&P!

Suppose you had been a follower of Mr. Buffett for some time and you invested $ 1000 in Berkshire Hathaway in 1964, then I congratulate you with your millions, because by now you would have made $ 11.6 million.

The big question is of course: how can the investment company of Warren Buffett be so successful? And perhaps even more importantly: how can you become just as successful as investment guru Buffett?

Below is an overview on logarithmic scale of what you could have made, if you had invested $ 1,000 – in Berkshire in a given year.

Benjamin Graham and Warren Buffett

You may wonder why we did not first discuss the most famous investment guru? If you would ask this question to Buffett himself, he would probably say that it is completely logical that Benjamin Graham is described first. Before Buffett himself became a well-known investor, he was taught in school by Graham and later worked for Graham’s company.

As you could read in the first article about Graham, the admiration even went so far that Buffett named his son Graham. Buffett’s investment philosophy is therefore broadly in line with Graham’s investment philosophy.

An important aim of the two men is that they only buy a stock when its intrinsic value (the value of the company calculated by forecasting future cash flows and discounting them to the present) is above the current market value. In that case, the company is actually worth more than what the market tells them.

In addition, they separate themselves from what they call ‘speculators’. Speculators are seeking for short-term profits in the world of fast money. Buffett, however, claims that achieving consistent returns can only be achieved by carefully analyzing companies, patience, and self-discipline.

The group to which Graham and Buffett belong are called the value investors. They are looking for the true value of a company and hold companies in their portfolio for a long time.

The big difference between Graham and Buffett lies perhaps in the fact that for Warren Buffett discipline and commitment are even more important. Whereas Graham decided to take profits and reinvest in another company after several years, Buffett invests in a company with the idea of “never” to get out. As long as the outlook remains good and he feels that there is future in the company, he will not sell the share.

In addition, Buffett advocates to invest in specific sectors rather than a good diversification. Consumer goods in particular, he considers an appropriate market because they are easy to understand and will always be needed.

Attractive stocks according to Warren Buffett

Following Graham was a lot easier because he wrote an excellent book about his investment philosophy. With Buffett we have to do with the book “Buffettology” which was not even written by himself but by his daughter Mary Buffett. Below are a number of statements that can be derived from Mary’s book.

A company must be predictable and understandable. When Warren Buffett does not understand something, he will not be making money with it. Likewise, he avoided technology stocks and instead focused on manufacturers of, for example diapers, soft drinks, ice creams and razors.

Avoid companies with large capital and / or R&D spending. Another reason not to include technology stocks in your portfolio.

Financial institutions, despite the large debt, are also interesting to him because of their strong market position. The so-called systemically important banks.

Look for companies that are able to offset cost increases with price increases in order to maintain profit margins.

Companies with strong management, but not dependant on one person.

Companies that purchase their own shares. This is an indication by the company itself that they view their own stock as an excellent investment for the future. In other words, they believe their shares are priced too low.

Buffett runs away when a company has negative cash flows and when companies need to make large investments in order to stay alive.

In a nutshell, we have now explained everything it takes to become a good investor according to the principles of Warren Buffett. With a combination of your own commitment and the philosophy of Benjamin Graham and Warren Buffett in mind you now have all the knowledge to become a successful value investor. You have to give a little push in the back, the next article will show you which indicators and ratios are most important according to Buffett’s investing principles. Additionally, we highlighted a share according to the guidelines and investment philosophy of Warren Buffett.